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Inside the Market’s roundup of some of today’s key analyst actions

RBC Dominion Securities analyst Geoffrey Kwan called Equitable Group Inc. (EQB-T) one of his “sleeper” picks for 2022, seeing the potential for the highest total return among Canadian diversified financial companies in his coverage universe.

In a research report released Tuesday previewing the year, he raised his rating for the Toronto-based bank to “outperform” from “sector perform,” seeing an “attractive buying opportunity” after a recent pullback in price. He emphasized its shares now trading at 1.25 times price to book value despite a forecast of 15-per-cent return on equity in 2022.

“EQB continues to execute well on its growth and diversification strategy,” said Mr. Kwan. “The Canadian housing and mortgage market remains strong and we think is likely to remain positive in 2022 with mortgage loan growth likely to moderate, albeit from elevated levels. We think EQB’s efforts to diversify its product offering and grow its digital EQ Bank brand, while not a key earnings driver yet, is consistent with its evolution toward a more full service bank. Furthermore, EQB continues to make good progress diversifying its funding sources, including the recent inaugural covered bond issue.”

In justifying his change, Mr. Kwan pointed to a trio of potential catalysts: “Continued positive trends in housing and mortgage market activity; significant returns of capital with the recent OSFI ban lifted regarding share buybacks and dividend increases and clarity on the impact to CET1 from moving to AIRB approach to credit risk measurement.”

He did trim his target for Equitable shares to $88 from $91. The average target on the Street is $93.64, according to Refinitiv data.

On the sector as a whole, Mr. Kwan said: “We have a positive 2022 outlook, but believe increased risks (e.g., inflation) warrant our best ideas having solid defensive attributes as well as offering above-average total return (i.e., we prefer our best ideas to forgo stocks with very high total return potential for ones with very good total return potential but should provide downside protection). By sector, we think P&C Insurance offers the best risk-reward reflecting positive industry conditions, catalysts, attractive valuations and strong defensive attributes. We think Private Equity should have another good year, benefiting from a strong fundraising environment, potential catalysts and in some cases, attractive valuations. We expect another positive year for asset/wealth managers, but more modest total returns in part as industry net sales surged in 2021 and are near the peak of the last cycle. Despite the hot housing market in 2021, we think our mortgage stocks should still do well in 2022 as valuations look attractive and housing demand is likely to remain strong (e.g., low rates, increased immigration, etc.) with housing supply continuing to be weak.”

Following a year in which his coverage universe outgained the S&P/TSX composite index by an average of 29 per cent with 14 of 19 companies outperforming, Mr. Kwan named a trio of companies as his “best ideas” for 2022. In order of preference, they are:

1. Intact Financial Corp. (IFC-T) with an “outperform” rating and $200 target, exceeding the $197.17 average on the Street

“We believe IFC is delivering positive fundamentals, is the most defensive stock in our coverage, has potentially significant catalyst(s) (e.g., non-RSA Canada monetizations or we think an asset swap for Aviva Canada could make a lot of sense), yet IFC trades at just 2.08 times P/BV, a level barely above recent historical troughs,” he said.

2. Element Fleet Management Corp. (EFN-T) with an “outperform” rating and $17 target, up from $16 and above the $15.84 average.

“Notwithstanding the semiconductor shortage, EFN is delivering strong fundamentals (71 per cent year-over-year growth in LTM new revenue units from customer wins/existing customer cross-sell),” he said. “We think evidence of normalizing OEM production in 2022 should have a significant positive impact on EFN’sshare price and the shares trade at 12.2 times P/E and 11-per-cent FCF yield (2023E). EFN also has strong defensive attributes and we think should be a relative winner within our coverage in a high inflation environment.”

3. Onex Corp. (ONEX-T) with an “outperform” rating and $132 target, up from $131. The average is $120.

“Onex appears mispriced, delivering very good fundamentals (more than 20 per cent year-over-year growth in Hard NAV/share, IRRs of 28 per cent for OP5 and 15 per cent for OP4 private equity funds), yet trades at a 16-per-cent discount to NAV and 10-per-cent discount to Hard NAV, which assumes zero value for the asset manager, carried interest and Gluskin Sheff,” he said. “2022 isl ikely to be an active fundraising year and this could provide evidence of achieving Onex’s 5-year Fee Related Earnings target. Doing so could be a significant positive catalyst given we think investors ascribe little to no value for the asset manager, yet we think the asset manager could be worth $22-$30 per share in 5 years.”

Mr. Kwan also made these target changes:

  • AGF Management Ltd. (AGF.B-T, “sector perform”) to $8.50 from $9. Average: $9.32.
  • Alaris Equity Partners Income Fund (AD.UN-T, “outperform”) to $25 from $24. Average: $23.71.
  • Brookfield Asset Management Inc. (BAM-N/BAM.A-T, “outperform”) to US$73 from US$70. Average: US$68.29.
  • Brookfield Business Partners LP (BBU-N/BBU.UN-T, “outperform”) to US$61 from US$62. Average: US$58.63.
  • First National Financial Corp. (FN-T, “sector perform”) to $46 from $48. Average: $46.42.
  • Home Capital Group Inc. (HCG-T, “outperform”) to $54 from $57. Average: $53.71.
  • IGM Financial Inc. (IGM-T, “sector perform”) to $55 from $54. Average: $55.78.
  • Power Corporation of Canada (POW-T, “sector perform”) to $47 from $45. Average: $47.25.
  • Sprott Inc. (SII-T, “sector perform”) to $64 from $60. Average: $60.76.


The ongoing negotiations between Centerra Gold Inc. (CG-T) and the government of Kyrgyzstan over the Kumtor facility are likely to result in a “mutually beneficial outcome,” according to Scotia Capital analyst Trevor Turnbull.

Following Monday’s confirmation of the talks to resolve the dispute over the gold mine, which was seized last year based on the environmental and safety concerns, the equity analyst raised his rating for the Toronto-based company to “sector outperform” from “sector perform,” expecting its capital structure will “materially improve” and valuations would be “extremely compelling.”

“The company stated the main points under discussion include 1) Centerra receiving the approximately 26.1-per-cent or 77.4 million of its shares held by the government and 2) the Kyrgyz assuming responsibility for the two subsidiaries, KGC and KOC, and the Kumtor mine,” said Mr. Turnbull.

“Under the terms ... the Kyrgyz government would be able to operate Kumtor without international legal challenges and likely have its status restored with the LBMA (London Bullion Marketing Association) for good delivery gold sales.”

He raised his target for Centerra shares to $13.50 target from $10, exceeding the $11.40 average on the Street.

Elsewhere, Raymond James’ Brian MacArthur raised his target to $12.50 from $11 with a “market perform” rating.

“While not completed we believe a settlement under the highlighted terms would be a positive for CG as it would reduce the number of shares outstanding and bring clarity to the Kumtor situation,” he said.

In a separate note, Mr. Turnbull cut his Mag Silver Corp. (MAG-N, MAG-T) target to US$20 from US$24 with a “sector perform” rating. The average is $30.58 (Canadian).

“MAG Silver and joint venture partner Fresnillo plc jointly announced a significant delay to the Juanicipio project’s mill commissioning schedule,” he said. “The state-owned electrical company just informed Juanicipio that approval for a tie-in to the power grid cannot be granted as previously expected due to COVID-related lack of staff needed to review the electrical installation, supervise the connection and inspect lockout devices for safety. Approval is anticipated after the first week of May 2022.

“We are surprised by the announcement given that at our mining conference earlier this month MAG expressed confidence in the timing of the power grid tie-in. It postulated the authorities would even be able to complete the electrical connection over the holiday period since there tends to be less industrial load during this time. We note that the Juanicpio plant achieved completion and stands ready for tie-in as originally scheduled.”


Macro tailwinds for Doman Building Materials Group Ltd. (DBM-T) are “re-accelerating,” according to Raymond James analyst Steve Hansen, bringing an enticing opportunity for investors.

He raised his financial projections for the Vancouver-based company, formerly CanWel Building Materials Group Ltd, on Tuesday, citing “the robust upturn in lumber and building materials (LBM) prices in recent months coupled with sustained strength in both Canadian and U.S. housing markets, including key U.S. states/regions where DBM’s recent Hixson acquisition boasts significant exposure.”

“After a volatile 3Q21 correction, LBM prices are again surging in response to heated U.S. housing markets, incremental supply chain constraints (i.e. B.C. flooding), and supply-side losses in key fiber baskets,” said Mr. Hansen. “For context, SPF lumber has surged more than 129 per cent off of its recent lows, recently pushing the benchmark back through the $1,000 per thousand board feet threshold. Benchmark plywood and OSB have also surged.”

“Recent data indicate that housing starts in both Canada and U.S. has also been robust, including key U.S. states/regions such as California and the U.S. South where DBM boasts significant exposure. Leading indicators such as new single family permits also look particularly encouraging. As a reminder, DBM’s recent US$375-million acquisition of Hixson Lumber (June, 2021) dramatically bolstered the company’s strategic footprint across the southern-central U.S. (adding 19 lumber treating plants & 5specialty sawmills), an acquisition that we believe will begin to shine in 2022.”

Raising his 2022 earnings per share projection to $1.14 from 90 cents and introducing a 2023 estimate of 78 cents, Mr. Hansen sees an opportunity for investors to add to their current positions on Doman given its shares have lagged its peers “considerably” during the recent LBM price rally.

Maintaining an “outperform” rating, he hiked his target to $10.50 from $9.75. The average is currently $9.92.

“While DBM boasts less leverage to LBM pricing than Canada’s cohort of primary producers, we argue it still has plenty of torque, as evident in the company’s gross margin and share price performance through recent LBM cycles,” said Mr. Hansen. “At the same time, we also point out DBM’s added downside protection and incremental total return profile that comes from the company’s healthy dividend, a feature that helps significantly narrow the performance gap over time (vs. capital appreciation only).”


H.C. Wainwright analyst Vernon Bernardino thinks Edesa Biotech Inc. (EDSA-Q) is “looking strong” entering 2022, seeing momentum for both of its leading drug candidates.

In a research report released Tuesday, he called the “strong” efficacy potential for the Toronto-based clinical-stage biopharmaceutical company’s EBO5 treatment for acute respiratory distress syndrome “intriguing.”

“In September 2021, the Phase 2 part of the Phase 2/3 study with EB05 was pre-emptively unblinded due to observed efficacy signal, and an independent monitoring board determined the study had met its objective,” said Mr. Bernardino. “Notably, a reduction in mortality in critically ill hospitalized patients treated with EB05 plus standard of care (SOC) treatment compared to placebo plus SOC. Specifically, the study’s independent Data and Safety Monitoring Board (DSMB) identified a strong efficacy signal (a 28-day death rate of 14.3 per cent [2/14 subjects]) with EB05 versus 36.8 per cent with placebo [7/19 subjects]), and in September 2021, Edesa requested the Phase 2 be unblinded. Supported by positive Phase 2 results and a strong recommendation by the study’s DSMB, we look for initiation of the Phase 3 trial as a positive catalyst in 1Q22.”

He also noted its EB01 anti-inflammatory drug for chronic allergic contact dermatitis achieved a key study milestone in December and believes it has the potential to be a novel therapy “without the safety concerns seen with current therapies.”

“We look for completion of enrollment in the ongoing Phase 2b study with EB01 and data as catalysts in 2022,” he said.

Following the Dec. 28 release of its quarterly results, Mr. Bernardino maintained a “buy” rating and US$16 target for Edesa shares. The average on the Street is US$18.


Credit Suisse analyst John Walsh raised his rating for General Electric Co. (GE-N), seeing its recent selloff bringing an “opportunity to get positive on this cyclical aerospace recovery stock.”

“GE is executing on its transformation to separate into three public companies: Energy (Power + Renewables), Aviation, and Healthcare,” he said. “The 14-per-cent pullback since the separation announcement on November 9 has created an opportunity for both absolute and relative price appreciation as GE should benefit from a cyclical recovery in 2022. We also see potential for a ‘rush for propulsion’ as airline customers have managed green time throughout the pandemic. In December, GE noted that Aviation revenue and FCF could return to pre-pandemic levels in 2023. We think cyclical recovery and FCF execution will drive the stock higher, despite a ‘lack of catalyst’ narrative into the spinoffs. Unlike other large conglomerate simplification, GE has positively revised guidance higher (e.g., FCF $7-billion-plus in 2023; Aviation FCF in ‘23) since the announcement.”

“We note that GE still has some strategic l-t uncertainties (insurance, Aviation self-funding), which prevents GE from being a top pick for us, but we do think the separation is from a position of strength. As such, we upgrade to Outperform (from Neutral).”

Mr. Walsh maintained a $122 target for GE shares. The current average is US$121.24.

Concurrently, he lowered Honeywell International Inc. (HON-Q) to “neutral” from “outperform” with a US$226 target, down from US$243 and below the US$236.92 average.

“We continue to believe that HON is a high quality Industrial Software company with leading businesses across each segment (e.g., aero aftrmrkt, building ctrls., UOP, and Intelligrated),” he said. “However, as we look across ‘mega’ cap stocks with leverage to cyclical Aerospace recovery, we see more upside potential in GE. We are downgrading HON to N while upgrading GE to OP from N. We note that HON and GE underperformed the S&P 500 in Dec 2021 by 2 per cent and 3 per cent, respectively. We are currently modeling 2022 Op. Margin exp. driven by Safety & Prod. Sols. and expect only modest margin expansion at Aero given already strong execution and neg. mix potential.”

“HON retains significant optionality with its balance sheet. We estimate $15B+ of capacity incl. of modest leverage in the n-t. Our EPS est. assume deployment of excess FCF after dividend to share repo. In our valuation framework, we previously applied $1 of earnings power based on share repo. In our current framework, we are applying a more modest 48 cents of earnings power based on recent M&A valuations for higher growth assets (e.g., Plex/ROK, Aspen/EMR, and Rogers/DD).”


Citing its “fundamental value along with a number of potential catalysts in acquisitions, organic outperformance, or an LSE listing,” Echelon Capital Markets analyst Rob Goff returned Converge Technology Solutions Corp. (CTS-T) to the firm’s “Top Picks Portfolio” on Tuesday.

“We look for CTS’s well-proven copy/paste/accrete formula to maintain its cadence in North America while it expands in Germany and enters the UK to continue adding shareholder value,” he said. “Having now completed 25 acquisitions since Q317 with the Company’s 53-per-cent-owned subsidiary Portage CyberTech Inc.’s recent purchase of OPIN Digital Inc., we look for CTS to move forward executing against its deep pipeline of strategic, accretive acquisitions.”

“We are fully confident that CTS will emerge stronger from the supply chain pains, where its scale strengthens its organic prospects given the prospects for ongoing supply concerns with customers where CTS’s supplier contracts represent a competitive advantage and where CTS can arguably leverage its position to complete acquisitions where prospective acquisitions have been impacted to a greater degree by supply constraints. We would look for one deal in Q122 to kickstart the calendar year, with a robust pipeline to follow.”

Mr. Goff has a “speculative buy” recommendation and $14.50 target for Converge shares. The average is $13.60.

“We look for Converge to move forward executing against its deep pipeline of strategic, accretive acquisitions,” he said. “We could see the current supply chain issuers encouraging smaller providers to pursue an exit. Our frequent positive PT moves have often coincided with accretive acquisitions where the Company’s ability to source and execute.

Meanwhile, analyst Gabriel Gonzalez added Silver X Mining Corp. (AGX-X, “speculative buy” and $1 target) to the portfolio.

“We are adding Silver X to Echelon Capital Markets’ Top Picks List, given the Company’s combination of production and cash flow catalysts expected in Q1/Q222, and an attractive valuation,” he said. “The Company has been ramping up production capacity at its Nueva Recuperada Project from 600tpd to 720tpd, and continues to develop mining infrastructure with which to expand production to 2,500tpd by 2024/25, and pursue other growth initiatives to turn it into a significant junior silver producer.”


In other analyst actions:

* Seeing a “favourable risk/reward profile,” Mackie Research analyst Toby Ma raised Skylight Health Group Inc. (SLHG-X) to “speculative buy” from “hold” with a $3.20 target, down from $4.80 and below the $5.53 average.

* TD Securities analyst Meaghen Annett raised her target for Aritzia Inc. (ATZ-T) to $57 from $53, topping the $52.43 average, with a “buy” rating.

* CIBC World Markets analyst Scott Fromson bumped up his Automotive Properties Real Estate Investment Trust (APR.UN-T) target to $16.50, exceeding the $14.34 average, from $14.75 with an “outperformer” recommendation.

“We view APR’s $38.5-million of transactions – two dealership properties and the land underlying an existing tenant dealership – as on-strategy and positive for the unit price,” he said. “The two properties expand the REIT’s Québec footprint, while the land deal consolidates the leasehold on a BC property. We are raising our estimates, based on increased acquisition forecasts.”

* Piper Sandler analyst Chartles Neivet raised his Methanex Corp. (MEOH-Q, MX-T) target to US$46 from US$44 with a “neutral” rating. The average is $51.67.

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